Revisiting Linkages between Financial Development and Trade Openness: Evidence from Developing Countries Online First

Abstract

This study aims at examining the relationship between financial development and trade openness for 22 developing countries over the period 1990–2022. The study employs a robust methodological approach: the cointegration test of Westerlund (2007) and the causality test of Dumitrescu and Hurlin (2012). The empirical results reveal that financial development has a long-term favorable impact on trade openness for developing countries. The results show that a bidirectional connectedness is observed under the Dumitrescu and Hurlin causality test between credit to the private sector and trade openness. Furthermore, a unidirectional link running from stock market capitalization to trade openness is evidenced. The study concludes that policymakers of developing countries should pursue strong financial development and increase trade openness to achieve a high level of economic growth. This research contributes, to the best of our knowledge, by investigating this area using recent and sophisticated econometric approaches.

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